“Double-digit returns achieved in 2019, 2021 and 2023 were well above our initial targets and driven by strong market performances. Small losses in 2018, 2020 and 2022 were well within the range of statistical and risk expectations, and partly caused by structured products’ mark to market losses that were later recovered. The positive skew in Patrimoine’s returns partly reflects markets, but has been accentuated by non-call structured products, which are deep in-the-money so not very sensitive to sell-offs, while coupons accrued over time,” says Chief Investment Officer, David Armstrong, who founded Longchamp Asset Management in 2013.

Patrimoine means heritage in French, signifying the goal to preserve and grow capital over time. Longchamp Patrimoine was Longchamp Asset Management’s first internally managed fund when it launched in September 2014. It was originally named Longchamp Absolute Return and started out with an all-weather mandate geared to wealth management with a cash +1.085% return target, but later shifted to a higher return and risk target of high single digits. “However, headline annualised volatility of 6-7% probably overstates downside risk since some of the structured product exposure has an asymmetric risk/return profile with more upside than downside,” says Armstrong.

Armstrong was previously Managing Director at Morgan Stanley & Co. International Plc, heading its funds and fund linked business, including the FundLogic UCITS platform. Armstrong earlier worked at Société Générale in equity derivatives, which forms one business line at Sanso Longchamp AM.

The firm has built up a broad suite of expertise in financial engineering designed to create more competitive structured products than those offered by private banks, such as equity replacement strategy, the Longchamp Autocall fund, launched in April 2019; in macro and credit trading, e.g. the Longchamp Solferino Credit Fund; and in quantitative strategies managed since 2018 such as Longchamp Galileo Multi Risk Premia, launched in April 2020, which was recognised in the Alternative Risk Premia category by our UCITS Hedge awards.

Eclectic mix

Patrimoine synthesises the firm’s repertoire. It has become an eclectic mix of tactical equity and credit beta focused on carefully selected segments such as Japanese or Indian equities (notably through funds they manage together with Dalton Investments, their Asian equity partner), or European high yield; some global macro wagers, and structured products especially trading more exotic markets such as repo, volatility, correlation, dispersion and dividends; as well as listed closed end funds at discounts that can sometimes also provide some indirect exposure to illiquid asset classes such as real estate.

Patrimoine has become a dynamic and diversified strategy revolving around five pillars: equities, fixed income, structured products, alternatives and arbitrage. They can be accessed via direct investment into stocks, bonds and listed funds; internal funds; affiliated funds and external funds, incorporating open and closed-end funds and structured products. Overall portfolio construction is based on return and volatility forecasts to optimise risk/return. “Funds usually make up half of the allocation, but direct investments allow for more flexibility and control,” points out Armstrong. Asset allocation and strategy selection calls can quickly respond to market opportunities. Turnover is generally low, though there have been a series of well-timed tactical and opportunistic allocations.

This open architecture framework provides Patrimoine with more flexibility than some funds of funds products that may have a more limited universe of asset classes, strategies and vehicles. Longchamp Patrimoine demonstrates a breadth of expertise comparable to or approaching some multi-strategy hedge funds. While the remit is global, they have often been especially adept at spotting opportunities and inefficiencies in the European market.

Changing allocations and contributions since Covid

The base case is an equal 20% weight for equities, fixed income, structured products, alternatives and arbitrage, but the allocations are dynamically and opportunistically varied. For instance, in 2020 arbitrage reached 40%, including some defensive and protective strategies. “After the Covid sell-off, this was steadily reduced in favour of long equities, ETFs and structured products to take advantage of a more risk-on climate,” recalls Armstong.

In March 2020, the drawdown was caused by real estate, including exposure in Italy, short volatility and some structured products, though at that time there was not much exposure to dividend futures.

As interest rates increased in 2022, the credit allocation steadily grew to over 30% to earn more carry, which is now generating 6-8% income. In 2022, long equities and credit unsurprisingly detracted from returns while two more exotic equity related strategies – dividends and dispersion – contributed positively, as did real estate.

In 2023, equities, credit and structured products were the largest contributors, profiting from the risk-on climate, but the well-designed structured products also had limited downside. “The positive convexity hedges that were helpful in risk off years limited costs in flat or up years such as 2023,” says Armstrong.

In the first half of 2024, equities and structured products have again been helpful, along with closed end funds.

In April 2024, equities and fixed income taken together were between 40% and 50% of exposure. Structured products were above 20% to take advantage of high coupon, low risk structures targeting returns as high as 15% per annum. Meanwhile profits have been taken on dividend exposures initiated in 2021 and short correlation exposures started in 2022, reducing the arbitrage allocation.

Internal, affiliated and external funds

In April 2024, 21.69% was in internal funds, 13.35% in funds managed with Dalton, and 24.43% in external funds.

The internal funds include the Longchamp Autocall Fund, and the new Longchamp Trocadero US Equity Defensive Fund. “This replicates US equity market performance via passive SPX exposure, coupled with a defensive overlay of QIS strategies that aims to significantly reduce the maximum drawdown,” says Armstrong. There is also some US equity exposure via a structured put writing strategy.

The external equity allocation emphasises Asia long/short and Japan long only. The Dalton funds trade equities in Asia Pacific and India, as well as a Japan strategy. Dalton’s Asia Pacific L/S UCITS fund has regularly received The Hedge Fund Journal’s UCITS Hedge award, as has the Longchamp Dalton India UCITS Fund, whose manager, Venkat Pasupuleti, featured in our 2021 “Tomorrow’s Titans” report on rising star hedge fund managers.

Patrimoine has also recently allocated to a global mining equities fund geared towards energy transition metals. There is also exposure to the Longchamp Solferino Credit fund, which has recently been invested into a broad range of European high yield, including hybrids, financials and special situations.

Tactical calls and structured products

“From the start of Patrimoine, significant performance has been generated from dividends (via Delta One and knockout structures) and structured products, such as long term, non-call autocalls, which have provided useful convexity and high coupons,” says Armstrong.

Sanso Longchamp understands how to use the idiosyncratic risk/return profile of structured products to trade markets from different angles. For instance, they may express a leveraged long delta view with limited risk; monetise high implied volatilities after a selloff by using autocalls, or wager on an unduly pessimistic dividend forecast embedded in a product.

Sanso Longchamp are experts at creating their own structured products, and they also allocate externally to those from banks. In April 2024, dividends apart, there was 26% in structured products, of which 40% is in the well diversified Longchamp Autocall Fund and 60% in direct products that express views on more specific markets, such as SGI European Repo Carry, based on an index run by Société Générale. “This exploits the term structure of repoes,” says Armstrong. 

Dividends

Inefficiencies and opportunities in structured products can arise from banks’ need to recycle risks, such as dividends. Sanso Longchamp has identified a product based on dividends paid by Société Générale, which is basically a kind of exotic call option on Société Générale dividends structured to give upside above a dividend strike, par if dividends match the strike, and zero if no dividend is paid. The product can also be redeemed early for an annual coupon of 18.56% under some scenarios and is not leveraged. 

Dividends have been most interesting in Europe or on some single FTSE 100 stocks in the UK, but Sanso Longchamp have not noticed interesting discounts in the US or Japan, where they prefer to invest directly into stocks. 

Sanso Longchamp have identified European dividend futures and structured products are often deeply discounted which gives a high probability of realized dividends exceeding those embedded in the future or structure. “This opportunity set does fluctuate and by April 2024 discounts on dividend futures had largely disappeared,” says Armstrong. Nonetheless, Sanso Longchamp are ready to revisit the space if value returns. “We remain alert to a market selloff and/or high autocall issuance, which could force liquidation of dividend positions and once again lead to under-pricing of long-term dividends that could become a useful stock replacement strategy,” says Armstrong. 

Dispersion

“Equity dispersion, i.e. short correlation, can express a macro view such as performance divergence between cyclicals and defensives, or it may turn out to provide protection as seen in 2022, when the VIX did very little but single stock volatility exploded,” says Armstrong. A classic dispersion product, short index volatility and long single stock volatility, performed well in 2022 as implied index volatility did not increase but single stock volatility realized well above strikes as the market bifurcated between growth and tech stocks declining while some value and commodity stocks rose. Lower correlations within the equity market suppressed the VIX. “High cash versus low cash dispersion products were one winner,” says Armstrong. 

Notably these products are not ETFs. The allocation to ETFs is capped at 20% and has never exceeded 3%.

Tactical macro calls

Alongside these newer and more exotic asset classes or sub-asset classes such as dividends and dispersion, Sanso Longchamp’s macro views can be more traditional and has expressed directional views through plain vanilla options, such as a call on Japan’s TOPIX equity index or more exotic option such as a “worst of” calls product on European equities. The product has also owned a US yield curve steepener, which involves some carry costs but is seen as a useful portfolio hedge. Sanso Longchamp’s expertise in QIS strategies is also used to structure low carry hedges. “Our discretionary macro calls evaluate all relevant parameters and potential dislocations,” says Armstrong.

Closed end funds

Patrimoine has an appetite for listed closed end funds at a discount to net asset value, which may also pay high dividends and might engage in buybacks. These could include Dan Loeb’s London Stock Exchange-listed Third Point Investors Ltd. Historically, the Longchamp Patrimoine Fund invested in another LSE listed fund, Boussard and Gavaudan’s B&G Holdings, and exited after strong performance. They have recently owned private equity and real estate funds trading at discounts. The fund currently owns Petershill Partners PLC, which takes stakes in alternative asset managers. In May 2024 listed real estate funds were the biggest CEF allocation.

Arbitrage and quant

Sanso Longchamp can allocate to convertible arbitrage or merger arbitrage, and quantitative strategies such as CTAs, but has not recently been active in these strategies.

Investor base

One quarter of EUR 33 million assets in Patrimoine belong to Sanso Longchamp staff and the rest are sub-allocations from other mandates: 37% from private banking and 38% from institutional clients. It is not currently possible to invest directly into Patrimoine.

Patrimoine is a small part of firm assets of circa EUR 3.2 billion partly because it is not marketed directly but also because some clients prefer Sanso Longchamp’s daily dealing products and cannot accept weekly liquidity. “However, the weekly liquidity is important to maintain strategic flexibility,” says Armstrong.

The Longchamp Patrimoine Fund’s investor base is mainly former capital markets professionals, high net worth individuals and external family offices including one linked to the luxury goods industry.